United States District Court, C.D. Illinois
March 16, 2004.
In re RANDOLPH S. MARTIN and CATHERINE FOX MARTIN, Debtors UNION PLANTERS BANK NATIONAL ASSOCIATION, Plaintiff/Appellee,
RANDOLPH S. MARTIN, Defendant/Appellant
The opinion of the court was delivered by: JEANNE SCOTT, District Judge
Appeal from the U.S. Bankruptcy Court Central District of Illinois
Judge Larry Lessen, presiding, Bankruptcy
Randolph Martin appeals from the Bankruptcy Court's decision that his
debt to Union Planters Bank National Association (Bank), evidenced by a
promissory note executed on December 17, 2001, was excepted from discharge
pursuant to 11 U.S.C. § 523(a)(2)(B) because Martin secured the loan
through the use of a false financial statement. For the reasons set forth
below, this Court affirms the Bankruptcy Court's decision.
STATEMENT OF FACTS
Martin is a cardiologist. He is a partner with 160 other physicians in
a multi-specialty group practice known as Springfield Clinic, LLP
(Springfield Clinic). He
is also an airplane pilot. In 1990 or 1991, he and an individual
named Don Mallette formed a corporation called Capital Aircraft, Inc.
(Corporation). Each owned 49 percent of the stock in the Corporation.
Martin's friend and attorney Jeremy Michaels owned the other two percent.
The Corporation initially sold airplane parts. Most of their business was
in South Africa. Beginning in 1992, the Corporation began selling DC9
aircraft to an airline in South Africa called BOP Air. The Corporation
then began brokering commercial aircraft. The Corporation also maintained
a large aircraft parts business. Most of the Corporation's sales were
outside of the United States.
Beginning in 1998, Martin and Mallette began setting up limited
liability companies (LLCs) to own and lease commercial aircraft and
aircraft engines. Martin and Mallette set up six separate LLCs. Martin
and Mallette formed an additional limited liability company as a holding
company called Capital Aircraft Holding Company, LLC, (Holding Company).
Martin and Mallette each owned 50 percent of the membership interests in
the Holding Company. The Holding Company, in turn, owned membership
interests in each of the six other LLCs. Other investors owned the
remaining membership interests in the LLCs. Many of these investors were
physicians at Springfield Clinic. Each of the LLCs purchased a commercial
grade aircraft or aircraft engines. The LLCs leased the aircraft and
aircraft engines to various clients around the world, mostly in South
Each LLC borrowed money to finance the purchase of its equipment. Each
loan was secured by the equipment and by personal guaranties executed by
of the LLC and by Martin and Mallette as members of the Holding Company.
The Enterprises also sometimes paid other physicians at Springfield
Clinic to execute additional personal guaranties for the loans. Martin
understood that he was personally liable, with the co-guarantors, to pay
the loans if the LLCs defaulted. Martin testified at trial that, "I
believe I signed guarantys for anything I ever did." Record on Appeal
(d/e 1) Document No. 8. Transcript of Trial Proceedings on June 30, 2003
(Trial Transcript) at 43.
Mallette ran the day-to-day operations of the Corporation, the Holding
Company, and the LLCs (collectively the Enterprises). Mallette was the
managing member of each LLC. Mallette testified at trial that he and
Martin had "day-to-day interaction" concerning the operations of the
Enterprises. Trial Transcript at 183. Martin also was a member of the
Board of Directors of the Corporation and was its Chief Executive
Officer. Id. Steven Keith Bentley provided business management consulting
services to the Enterprises from August 1998 to January 2001. He
testified that Mallette ran the day-to-day operations of the
Enterprises. According to Bentley, Martin was involved in
policy-setting, "acting as a member of the board of directors."
Supplemental Record on Appeal Transcript of Deposition of Steven Keith
Bentley (d/e 6) (Deposition) at 57.
According to Martin, the aviation sector deteriorated in 1999 or 2000.
In early 2000, the LLCs' equipment lessees began falling behind in their
rental payments. Martin then started lending money to the Holding Company
to cover the debt service
on the LLCs' loans. Between January 2000 and June 30, 2000, he advanced
over $800,000.00 to the Enterprises. By the summer of 2001, Martin had
advanced over $1,000,000.00. By January 2002, Martin had advanced
approximately $1,700,000.00 to the Enterprises.
Martin also formed a separate corporation called Martin Leasing, Inc.
(Martin Leasing). Martin owned all of the stock of Martin Leasing and was
its only officer. Martin Leasing owned a 1980 Cessna Citation II
(Citation) aircraft which Martin used for his personal travel. Martin
Leasing owed approximately $1,500,000.00 on a loan secured by the
Citation. Martin personally guaranteed this loan.
In November 2001, Timothy Young talked to Martin about refinancing the
Citation. Young was an independent broker who specialized in arranging
aircraft financing loans. Young told Martin that he believed he could
find a loan with a lower interest rate. Martin authorized Young to see if
he could secure a new loan to refinance the Citation.
Martin provided Young with his 1999 and 2000 tax returns and a personal
financial statement dated April 30, 2001 (Financial Statement). Record on
Appeal (d/e 1) Document No. 8. Trial Exhibits Accompanying Trial
Transcript (Exhibit). Exhibit 20. According to Young, Martin confirmed
that the Financial Statement was still currently accurate. Trial
Transcript at 88. The Financial Statement stated that Martin had assets
totaling $6,720,000.00, and liabilities totaling $2,664,000.00, resulting
in a net worth of $4,056,000.00. The Financial Statement disclosed that
Martin excluded his retirement account at Springfield Clinic worth
$350,000.00 from the calculation of his net worth.
The Financial Statement listed the value of Martin's stock in the
Corporation at $350,000.00, and the value of his membership in the
Holding Company at $250,000.00. These values came from Bentley. Bentley
provided Martin with the values for an earlier financial statement dated
June 30, 2000. Bentley testified that these values were accurate
representations of Martin's interest in the Enterprises, at the time he
stopped providing services to the Enterprises, in January 2001.
Deposition at 20, 32.
The Financial Statement contained certain inaccuracies. The Financial
Statement listed the Citation as a personal asset and the loan secured by
the Citation as a personal loan, rather than a corporate asset of Martin
Leasing and a corporate loan which Martin had personally guaranteed.
Martin included a condominium in Florida, valued at $100,000.00, which
was actually titled in his mother's name. Martin, however, paid for the
condominium. Martin listed a motorcycle which he no longer owned. Martin
did not list the $1,000,000.00 plus in loans that he had made to the
Holding Company since January 2000. The Financial Statement overstated
the value of his publicly traded securities in various brokerage
accounts; however, Martin accompanied the Financial Statement with
current account statements from the various
brokers which disclosed the current market value of those assets.*fn1
The Financial Statement also did not disclose the personal guaranties
that Martin signed to guarantee the debts of the Enterprises. At that
time, Martin had guaranteed $23,000,000.00 of the Enterprises' debts.
These debts were also secured by the aircraft, aircraft engines, other
assets of the Enterprises, and by the personal guaranties of the other
investors. Martin testified that Bentley developed the format that he
used for the Financial Statement. Martin testified that he did not list
the guaranties because the format did not include a place for personal
guaranties. He said that he never listed the guaranties on any of the
financial statements he gave to any lender. Trial Transcript at 63. He
testified that the guaranties were not listed as liabilities on the
Financial Statement because he believed that they were not liabilities
because the assets of the Enterprises exceeded the debt. Id. at 45. He
also testified that he believed the co-guarantors were financially
sound. Id. at 65.
Bentley developed the format for the Financial Statement while he was
providing consulting services to the Enterprises. He helped prepare
financial statements for Martin and the other individual investors in the
Enterprises. He did not advise Martin or the other guarantors to list the
personal guaranties on their financial
statements because, during the time that he assisted them, the
Enterprises were solvent and the likelihood that the individuals would be
required to pay the debts was remote. He stated that he would have
advised the guarantors, including Martin, to include the guaranties on
their financial statements if the guarantors had better than a 75 percent
chance of having to pay the debts. Deposition at 28. Bentley stated that
the guaranties were also indirectly reflected on the financial statement
form that he developed in that the value of Martin's interest in the
Corporation and Holding Company was a net value that reflected the value
of the Enterprises' assets less liabilities that Martin personally
guaranteed. Deposition at 23.
Martin's 1999 and 2000 tax returns that Martin gave Young showed that
he had an adjusted gross income in 1999 of $978,046.00 and an adjusted
gross income in 2000 of $587,054.00. Exhibit 2. The difference in income
was due in large part to the reduction in Martin's taxable wages from
$384,705.00 in 1999 to $9,231.00 in 2000. Exhibit 1 at 271, Exhibit 2 at
287.*fn2 The 2000 return showed accumulated passive losses of
$1,621,073.00, from the Enterprises. Exhibit 2 at 283. The returns noted
that Martin's investment in each of the Enterprises, and his interest in
Springfield Clinic, were "at risk." Exhibit 2 at 284 & 314.
Young sent faxes to various lenders notifying them of the opportunity
to refinance the Citation. The fax included basic information about the
Martin, along with the first two pages of Martin's 2000 tax return.
He sent one of these faxes to Michael Holland, a representative of the
Bank who handled airplane financing loans. Holland contacted Young and
asked for more information. On December 11 or 12, 2001, Young forwarded
to Holland the full tax returns and the Financial Statement. Holland
forwarded the information to the loan underwriters for the Bank.
Deborah Culler was the underwriter in charge of evaluating the proposed
loan to Martin. She and her staff reviewed the Financial Statement and
the tax returns received from Young, and secured a credit report. Trial
Transcript at 140. Holland provided information on the estimated value of
a 1980 Citation, such as the one owned by Martin Leasing. Culler stated
that the Bank considered the borrower's ability to generate income to pay
the debt service as a key factor in evaluating these types of loans. The
Bank also considered the value of the collateral and the borrower's
credit history and his other assets.
The proposed loan would be 89.6 percent of the estimated $1,757,000.00
value of the plane. Martin's available disposable income, over and above
taxes and living expenses, equaled 156 percent of his debt service
obligations disclosed on the Financial Statement. Trial Transcript at
146. Martin thus had ample income to make regular payments on his debts,
including the debt service on the Citation. The credit report revealed a
Beacon score of 705. This score is a rating of a person's credit
history. Culler testified that anything over 660 is an excellent score.
The only question in Culler's mind was the reduction in Martin's
taxable wage income from 1999 to 2000. Culler testified that the Bank
contacted Young to find out the reason for the change in income. Young
informed a Bank representative that Martin's wage income was reduced in
2000 because he decided to defer his income from his medical practice
that year. On December 13, 2001, Culler's staff prepared a Credit Memo
recommending that the Bank approve the loan. Exhibit 7. The Credit Memo
referred to information contained in the Financial Statement, the tax
returns, the credit report, and the Beacon score as the basis for the
The Bank followed Culler's recommendation. Martin Leasing signed the
new promissory note in the principal amount of $1,575,560.00 on December
17, 2001. Martin personally guaranteed this debt. The Bank's
representative inspected the plane on December 19, 2001. The Bank's loan
committee formerly approved the loan on December 20, 2001. Exhibit 8 at
363. The Bank funded the loan on December 24, 2001. and paid off the
prior lender. The written report on the inspection of the Citation was
dated December 26, 2001. Exhibit 18 at 479.
The financial problems of the Enterprises continued. In late 2001 and
early 2002. Martin and Mallette attempted to negotiate alternate
financing for the Enterprises. Martin hoped the new financing would
enable him to recover $1,500,000.00 of the $1,700,000.00 that he had
advanced since January 2000. The new financing did not materialize.
Eventually, the Enterprises became insolvent. Martin filed personal
bankruptcy on May 24, 2002.
Martin's first meeting of creditors was scheduled for June 17, 2002.
See 11 U.S. § 341. Pursuant to Bankruptcy Rule 4004, the deadline for
filing complaints to object to the dischargeability of the debt was 60
days thereafter, or August 16, 2002. The June 17, 2002, date for the
first meeting of creditors was continued to August 8, 2002, because the
original Bankruptcy Trustee declined to serve. The meeting began on
August 8, 2002, but was not completed on that date. The meeting resumed
on August 15, 2002, and was completed on that date.
On August 15, 2002, the Bank filed a motion to extend the time to file
complaints to object to the dischargeability of its claim. The Bank's
motion stated that the meeting of creditors had been continued to August
8, 2002, and that Bank wanted additional time, to "explore the relevant
facts and circumstances and determine whether the filing of such actions
may be appropriate." Record on Appeal (d/e 1) Document No. 20. Motion of
Union Planters Bank to Extend Time to File Dischargeability Complaints
and Objections to Discharge, at 2.
The Bankruptcy Court entered an order on August 16, 2002, granting the
motion. Martin filed an objection to the extension of time. The
Bankruptcy Court held a hearing on the objection on September 20, 2002.
Martin states in his brief that the hearing on the objection was held by
telephone. The record on appeal contains no transcript or other evidence
of what occurred during that telephone hearing. The record, however,
contains a transcript of an in-court hearing that occurred on that date.
Most of this hearing concerned other matters. The participants in the
discussed the extension of the time in which to file non-dischargeability
complaints. The participants in discussion were Bankruptcy Judge Larry
Lessen; the Bankruptcy Judge's law clerk, Mr. Cinotto; Martin's Bankruptcy
Trustee, Mr. Dunn; and Martin's counsel, Mr. Gates:
Mr. Cinotto: Do you want to extend the discharge
date for 30 days or so?
Mr. Dunn: Yes, I think that is good.
The Court: I will extend the discharge date 30
Mr. Dunn: The reason he says that is because Union
Planters has until Monday to file their discharge.
Mr. Gates: That's today.
Mr. Dunn: It's the 23rd, I think.
Record on Appeal (d/e 1) Document No. 27. Transcript of September 20.
2002. Hearing, at 24. The Bank filed its complaint in this action on
September 18, 2002.
The case went to trial before the Bankruptcy Court on June 30, 2003.
Martin, Young, Holland, Culler and Mallette testified. Bentley's
deposition was also admitted into evidence. Culler testified that if she
had known that Martin had outstanding personal guarantees in excess of
$23,000,000.00, she would never have recommended the loan. She would not
have even considered making the loan. She would have considered Martin's
guaranties as outstanding liabilities for purposes of evaluating the
proposed loan. Martin's liabilities would have far exceeded his assets
and he would not have had sufficient income to service the debt.
Trial Transcript at 152-53. She
testified that the Bank would not have made the loan.
Culler further stated that if she had known Martin had been lending
significant amounts of money to the Enterprises, she would have inquired
further because those loans represented a significant part of Martin's
assets. She would have requested financial information from the
Enterprises. She would have wanted to know how the Enterprises were going
to pay Martin back.
Martin's counsel cross-examined Culler concerning the significance of
Martin's personal guaranties, in her evaluation process. Martin's counsel
referred to the guaranties as contingent liabilities:
Q. And let's talk about contingent liabilities. The
negative value of a contingent liability is
affected by several things, is it not? It is
affected by whether or not the principal obligor is
solvent, right? In other words, if the principal
obligor is paying a debt and he's got tons of
dough, the guarantor's problems are not too great.
Are you with me on that?
A. In most cases, yeah.
Q. And if the value of the security, the collateral
given for the note, exceeds the note, again, the
negative value of the guaranty to the guarantor is
not a big deal, right?
A. That I differ with you on a little bit more,
but I will go with you.
Q. And if there are a fair amount of co-guarantors,
all of whom are men of substantial means, that
would also affect how you view these guarantys,
would it not?
A. It would depend on the type of guaranty.
. . .
Q. In other words if he has some guy over here, if
Bill Gates has guaranteed the note along with Randy
Martin and are joint and several guarantys, you
would be less inclined to be too worried about
Randy's guaranty, right?
A. If Bill Gates had guaranteed the loans with
Randy Martin, I wouldn't have cared whether Dr.
Q. Thank you. Now you have got in this instance your
lawyer keeps talking about $20 million in
guarantys. What he hasn't mentioned to you is that
all of these guarantys have co-guarantors, all of
whom are surgeons or physicians in this town, and
there is at least five or six for each particular
loan. And he also didn't mention to you that at the
time these guarantys were made, the assets of the
entities exceeded-the value of the assets exceeded
the amount of the debt. Now, if I tell you those
things, does that change your blanket statement
that if I had known about these things, I would
have never made the loan?
A. I am going to add something to the blanket
statement. If I had then known that they were
being flown into where they were being flown, I
would add that, and I would found that out, and
I would not have made the loan.
Q. Back to my question, if you don't mind.
A. If I would have gotten-if I was aware of that,
I would have gotten the financial statements of
Capital Air, Inc., I would have required it for
the past three years.
Q. Right. And let's assume those financial statements
for the past three years showed that the company
was solvent in making its payments and had a
positive net worth in excess of a million dollars?
A. If it had showed that it had a positive net
worth in excess of a million dollars, that is
not much with a $20 million guaranty.
Q. I don't know how much it was. Assume it was a
positive net worth of a substantial amount.
A. Well, if it had shown that, then I don't think
he would be sitting here today. So it probably
wouldn't have shown that.
Q. Again, ma'am, please answer my question. If it
had shown that, you wouldn't have cared, would
you, about the guarantys?
A. They would not have mattered, no.
Trial Transcript at 172-724.
Martin's counsel asked Mallette several questions about the value of
the Enterprises. Mallette testified that the fair market value of the
Corporation as of March 31, 2001, was $552,609.00, and Martin's interest
was worth $276,000.00. He testified that the total fair market value of
the Holding Company and LLCs was $3,663,538.00 as of March 31, 2001, and
that the value of Martin's interest in them was $612,887.00. Trial
Transcript at 190-96.*fn3 To arrive at these figures, Mallette first
opined on the fair market value of the aircraft and other equipment owned
by the LLCs. He then added any outstanding receivables to arrive at his
estimate of the value of the LLCs' assets. He then subtracted outstanding
debts to arrive at his opinion of the LLCs' net worth. Mallette ignored
depreciation of the assets in making these
calculations. He further assumed that the unpaid lease payments and
other receivables were completely collectable. Mallette testified that
the net worth of the Enterprises would have been the same in November and
December 2001. Id.
Bentley disagreed with Mallette's estimates. He testified that as of
June 30, 2000, Martin's stockin the Corporation was worth $350,000.00,
not $276,000.00, and his interest in the Holding Company was worth
$250,000.00, not $612,887.00. Bentley further testified that the
Corporation and the Holding Company lost value after the September 11,
2001, terrorist attack on the United States. He testified that the
terrorist attack drove down the value of aviation businesses 50 to 75
percent. Deposition at 41-45. He opined that in November 2001, the value
of Martin's interest in the Holding Company would have been a "negative
number." Deposition at 44. He opined that the value of Martin's interest
in the Corporation would have been reduced, although he did not give an
estimate of the amount of the reduction in value. Id.
THE OPINION BELOW
The Bankruptcy Court issued its Opinion on August 28, 2003. Record
on Appeal (d/e 1) Document No. 9 Opinion entered August 28. 2003
(Opinion). The Bankruptcy Court found that the debt was excepted
from Martin's discharge pursuant to 11 U.S.C. § 523(a)(2)(B) because
Martin had secured the loan through the use of a false financial
The Bankruptcy Court first found that the Financial Statement was
false. The Bankruptcy Court applied two different methods of analysis to
determine whether the statement was materially false. The first method
examines whether the statement offers a substantially untruthful picture
of the financial condition of the debtor. Id. at 8. See Matter of
Bogstad, 779 F.2d 370, 375 (7th Cir. 1985). The second method is a "but
for" test which looks at whether the financial institutions would have
made the loan had it known the debtor's true financial condition.
Opinion at 9. See In re Harasvmiw, 895 F.2d 1170, 1172 (7th Cir. 1990).
The Bankruptcy Court also stated in its summary of the applicable law
that the failure to disclose material information may render a financial
statement materially false; that contingent liabilities are material if
the debtor is sophisticated and consciously aware of the existence of the
liability; and that the sophisticated debtor has a duty to disclose the
contingent liabilities. Id. at 9-10, citing In re Wingo, 113 B.R. 249,
252 (W.D. Va. 1989); In re Guistolisi, 61 B.R. 821, 823 (Bankr. S.D. Fla.
The Bankruptcy Court found that the financial statement was materially
false under either the "but for" analysis or the "untruthful picture"
analysis. The Bankruptcy Court found Culler's testimony, that the Bank
would not have made the loan had it known about the guaranties, to be
credible. The Bankruptcy Court further found that the omission of the
guaranties from Martin's financial statement painted a substantially
untruthful picture of Martin's financial condition. Opinion at 10.
The Bankruptcy Court then determined that the Bank reasonably relied on
the materially false statement. The Bankruptcy Court looked at the
totality of the
circumstances to determine whether the reliance was reasonable. Id. at
11-16. The Court listed 11 different factors for determining the
reasonableness of the Bank's reliance. Id. at 11. The Bankruptcy Court
found, in particular, that Martin's level of sophistication was a factor
in the reasonableness of the Bank's reliance. The Court noted that Martin
was highly educated and was an experienced businessman. Martin had been
in the airplane business for thirteen years and had extensive involvement
with personal guaranties of business debt. The Bankruptcy Court noted
that Martin used an agent, Young, to solicit the business from the Bank.
Given the level of Martin's sophistication, the Court concluded that the
Bank could reasonably expect him to be able to prepare a personal
financial statement that would accurately represent his financial
condition. The Bank, therefore, acted reasonably when it relied on the
Financial Statement in combination with the tax returns, credit report,
and Beacon score to conclude Martin was a good risk for the loan.
Finally, the Bankruptcy Court found that Martin intended to deceive the
Bank. The Bankruptcy Court stated that an intent to deceive can be proven
either through direct evidence, or circumstantial evidence that logically
raises an inference that the debtor knew or should have known that the
false representation would induce the lender to make the loan. The
Bankruptcy Court stated that intent to deceive can also be established by
reckless indifference or reckless disregard of the accuracy of the
information in the financial statement. The Bankruptcy Court noted that
the material omission of a substantial contingent liability by a
sophisticated borrower, which could
not have been merely an oversight, was evidence of intent to deceive.
Id. at 16. See Matter of Sheridan, 57 F.3d 627. 633 (7th Cir. 1995): In
re Hodges, 116 B.R. 558. 561 (Bankr. N.D. Ohio 1990). The Bankruptcy
Court also cited the case of In re Jones, 88 B.R. 899 (Bankr. E.D. Wis.
1988), for the proposition that a rebuttable presumption of intent to
deceive arises from publishing a materially false financial statement.
In applying these legal principles to the facts in this case, the Court
found that Martin had an intent to deceive. The Court stated that Martin
admitted that he was aware of the guaranties. The Bankruptcy Court found
that this admission meant that Martin did not omit the guaranties from
the Financial Statement as an oversight; rather, he made a conscious
decision to leave them off. The Bankruptcy Court found this conscious
decision to omit this material information was sufficient evidence to
establish intent to deceive. Opinion at 17.
The Court then concluded that the debt was excepted from discharge
pursuant to § 523(a)(2)(B). The Bankruptcy Court reserved for a later
hearing the determination of the amount of the non-dischargeable
Martin argues on appeal that the Bankruptcy Court erred in determining
debt to the Bank was non-dischargeable under § 523(a)(2)(B).*fn5
Exceptions to discharge are to be construed strictly against the creditor
and liberally in favor of the debtor. In re Morris, 223 F.3d 548, 552
(7th Cir. 2000). To establish that Martin's debt to the Bank was
non-dischargeable under § 523(a)(2)(B), the Bank had to prove by a
preponderance the evidence that: (1) Martin made a statement in writing;
(2) the statement was materially false; (3) the statement concerned
Martin's financial condition; (4) Martin made the statement with the
intent to deceive; and (5) the Bank actually and reasonably relied on the
statement. Id. Martin argues that the Bankruptcy Court erred in its
1. the Financial Statement was materially false;
2. Martin intended to deceive the bank;
3. the Bank relied on the Financial Statement; and
4. the Bank's reliance was reasonable.
Martin also appeals from the Bankruptcy Court's order granting the
Bank's motion to extend the time to file § 523 non-dischargeability
This Court reviews the Bankruptcy Court's factual determinations for
clear error only. Bankruptcy Rule 8013. A factual finding is clearly
erroneous if on reviewing the evidence, this Court is, "left with the
definite and firm conviction that a mistake has been committed." Matter
of Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994). The Court reviews the
Bankruptcy Court's legal conclusions de novo. Matter of Sheridan, 57 F.3d
at 633. Decisions within the discretion of the Bankruptcy Court may only
be reviewed for an abuse of discretion. A decision is an abuse of
discretion only if no reasonable person could agree with the Bankruptcy
Court. See In re Morris, 223 F.3d at 554. Under these standards of
review, the Court finds no basis to reverse the Bankruptcy Court's
A. The Material Falsity of the Financial Statement
The Court sees no basis to question the Bankruptcy Court's finding that
the Financial Statement was materially false. Culler testified that the
Bank would not have made the loan had it known about the guaranties. The
Bankruptcy Court found her testimony to be credible. The fact that the
financial institution would not have made the loan if the facts been
known, is a "recurring guidepost" to show that a financial statement is
materially false. In re Harasymiw, 895 F.2d at 1172. Based on that guide
post, the Bankruptcy Court's conclusions were not clearly erroneous.
In addition, the evidence supports the conclusion that the guaranties
a significant risk of liability to Martin in November 2001, and their
omission rendered the Financial Statement materially false. Starting in
January 2000, and continuing for the next two years, Martin lent large
amounts of money to the Enterprises because equipment lessees were not
paying the LLCs the rent on the equipment leases. By June 30, 2000, he had
advanced the Enterprises over $800,000. By the summer of 2001, that
figure had increased to over $1,000,000.00. By January 2002, his loans to
the Enterprises totaled $1,700,000.00. The Enterprises' constant need for
cash advances supports the inference that they were in serious financial
difficulty and were at significant risk to default on the loans that
Martin had guaranteed.
In addition, Bentley testified that after September 11, 2001, Martin's
interest in the Holding Company had a negative value. The Holding
Company's only assets were the membership interests in the LLCs, which
owed the $23,000,000.00 that Martin had guaranteed. A negative value in
the Holding Company means that the membership interests in the LLCs had a
negative value, which implies that the assets of the LLCs were no longer
sufficient to repay the loans guaranteed by Martin. This evidence
supports the finding that by November 2001, Martin was at significant
risk of being called upon to perform on his $23,000,00.00 in personal
guaranties. Based on this evidence, the Bankruptcy Court did not clearly
err in finding that the omission of those guaranties from the Financial
Statement gave a materially false picture of Martin's financial
condition. See In re Napier, 205 B.R. 900, 905-06 (Bankr. N.D. Ill.
Martin argues that Culler admitted that the guaranties were not
material. Martin relies on Culler's testimony quoted above. Culler made
no such admission. Culler stated that if Bill Gates, one of the richest
persons in the world, had personally guaranteed these debts, then she
would not have worried about Martin's guaranty. Bill Gates did not
guarantee these debts; thus, this observation is meaningless. Culler also
agreed that the net worth of the entities primarily obligated to pay the
guaranteed debts could affect the significance of a personal guaranty on
a guarantor's personal financial statement. If the business entity
possessed a substantial positive net worth over and above the guaranteed
debt, then the guaranties would not be material in the Bank's loan
evaluation process. Culler, however, stated that $1,000,000.00 in net
worth would not be significant in this situation, given the
$20,000,000.00 in guaranteed debt. Culler did not agree that Martin's
guaranties were immaterial given the financial condition of the
Martin argues that Mallette and Bentley's testimony established that
the net worth of the Enterprises was so great that Martin's risk of being
required to pay on the guaranties was negligible, especially considering
the existence of other guarantors. This Court disagrees. Bentley
testified that he did not believe that Martin was required to list the
guaranties on his June 30, 2000, financial statement because the
Enterprises had a positive net worth at that time. Bentley also
testified, though, that Martin should have listed the guaranties on the
Financial Statement if the financial condition of the Enterprises
worsened, and the likelihood increased that he and his co-guarantors
would be required to perform on their guaranties.
The evidence indicates that the Enterprises' financial condition
worsened by November 2001. Between June 2000 and November 2001, Martin
continued to advance hundreds of thousands of dollars to the Enterprises
to keep them afloat. Martin's loans increased the Enterprises' debt and
lowered their net worth. Then the September 11 terrorist attack drove
down values of aviation businesses, including the Enterprises. Bentley
testified that by November 2001, Martin's interest in the Holding Company
had a negative value, and his holdings in the Corporation had a reduced
value. Given this evidence, the Bankruptcy Court did not clearly err in
finding that Martin faced a real risk of liability by virtue of the
guaranties and so their omission from the Financial Statement rendered
the statement materially false.
This Court acknowledges that Mallette disagreed with Bentley,
concluding that the Enterprises still had a net worth of approximately
$3,600,000.00 in November 2001. This Court, however, cannot reverse
because of a conflict in the evidence. The Bankruptcy Court's factual
findings are consistent with competent evidence in the record and so are
not clearly erroneous even if other evidence might be conflicting. See
EEOC v. Sears. Roebuck & Co., 839 F.2d 302, 309 (7th Cir. 1988)
("[W]here there are two permissible views of the evidence, [bankruptcy
court's] choice between them cannot be clearly erroneous." quoting
Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)).
Martin also argues that the Bankruptcy Court based its decision on an
legal standard. Martin argues that the Bankruptcy Court held that the
failure to disclose personal guaranties, per se, rendered the Financial
Statement materially false. This is incorrect. Part of the Bankruptcy
Court's summary of the law arguably appears to require disclosure of
personal guaranties as a matter of law. The Bankruptcy Court's finding
that the Financial Statement was materially false, however, was not based
on a per se rule. Rather, the Bankruptcy Court analyzed the evidence
presented under both the "but for test" and the "substantial
untruthfulness test" and found that the Financial Statement was
materially false. Opinion at 10. As explained above, this finding is not
B. Intent to Deceive
The Bankruptcy Court also did not clearly err in finding that Martin
intended to deceive the Bank. Intent may be proven either through direct
or circumstantial evidence. Matter of Sheridan, 57 F.3d at 633. As Martin
sets out in his reply brief, an intent to deceive may be inferred if: "1)
the statement is materially false; 2) Martin knew his statement was false
or was reckless in making the false statement; and, 3) knew or should have
know [sic] that Union Planters Bank would be induced to make the loan as
a result of the materially false statement." Reply Brief at 15, citing
Matter of Sheridan, 57 F.3d at 633. The Bankruptcy Court found that each
of these three factors had been proven. The Bankruptcy Court found that:
(1) the Financial Statement was materially false because of the omission
of the $23,000,000.00 in personal guaranties; (2) Martin, a sophisticated
businessman, made a conscious
decision to omit the guaranties from the Financial Statement and so knew
that the statement was false or was reckless in making the statement; and
(3) Martin knew or should or known that any new lender would be induced
to make the loan based on the materially false statement. The Bankruptcy
Court's finding on each of these points is not clearly erroneous.
As set forth above, the evidence supports the conclusion that the
Financial Statement was materially false. Further, the evidence supports
the conclusion that Martin consciously decided to omit the existence of
the guaranties from the Financial Statement. The Bankruptcy Court found
that Martin was a sophisticated businessman. Martin vociferously protests
that he is a novice in the ways of business, but the evidence supports
the Bankruptcy Court's finding to the contrary. Martin is a partner in a
large medical practice with 160 physician partners. A medical practice
with 160 partners is a significant business. He also was involved in the
Enterprises for over ten years. He was Chief Executive Officer and a
member of the Board of Directors of the Corporation. He was in daily
contact with Mallette concerning the operations of the Enterprises. He
participated in making policy for the Enterprises. He was able to testify
cogently about the structure of the Enterprises, which involved a
corporation, a holding company, and six other LLCs that held the various
aircraft and engines as legally separate ventures. See Transcript at
8-14. He formed Martin Leasing to own the Citation, rather than own the
plane directly as a personal asset. He also had extensive experience with
personal guaranties. He said that he signed a personal
guaranty for anything he ever did. He understood that he and his
co-guarantors were legally obligated to pay the debt, should the
Enterprises default on the loans. All of this evidence supports the
Bankruptcy Court's finding that Martin was a sophisticated businessman.
The Bankruptcy Court found that Martin consciously decided to omit any
disclosure of $23,000,000.00 in contingent liabilities from his personal
financial statement. Martin testified that he knew the guaranties existed
and left them off the Financial Statement because he decided that they
were not liabilities. Transcript at 45. The Bankruptcy Court found that,
under these circumstances, a conscious decision by a sophisticated
businessman to omit $23,000,000.00 in personal guaranties from this
Financial Statement because he deemed them not to be liabilities raised
an inference of an intent to deceive. Opinion at 16-17. Such a finding is
not clearly erroneous. See In re Hodges, 116 B.R. at 562: In re Wingo,
113 B.R. at 252: In re Guistolisi, 61 B.R. at 823.
The evidence also supports the conclusion that Martin knew that the
Bank would rely on the materially false statement to make the loan.
Martin and Bentley both testified that Martin had previously prepared
financial statements for the purpose of applying for bank loans. Young
told Martin that he needed a current financial statement as part of a
package that he would send to prospective lenders. Martin gave Young the
Financial Statement and told Young that this Financial Statement was
currently accurate. Martin authorized Young as his agent to solicit loans
the Citation through the use of the Financial Statement. This evidence
indicates that Martin understood that a lender such as the Bank would
rely on the Financial Statement when deciding whether to extend credit.
Martin argues that the Bank did not prove that he knew the Financial
Statement was materially false or that he was reckless in making the
statement. He argues that the Bank's evidence proved at best that he made
an honest mistake in believing that the guaranties were not material. The
Court disagrees. The evidence supports an inference that Martin was
reckless in omitting the guaranties from the Financial Statement. Martin
testified that the aviation sector of the world economy began having
problems as early as 1999. He further testified that as early as January
2000, the Enterprises were not generating enough income to pay their
bills; he had to lend the Enterprises money to keep them from defaulting
on the guaranteed debts. Over the next two years, he advanced
$1,700,000.00 to the Enterprises. Martin clearly knew that there was a
problem. The September 11 terrorist attacks shocked the aviation industry
further, thereby compounding the financial problems of the Enterprises.
This evidence supports the inference that Martin recklessly ignored the
Enterprises' financial difficulties when he decided that his
$23,000,000.00 in personal guaranties of these troubled businesses' debts
were not material to a statement of his personal financial condition. At
a minimum, such a finding of recklessness is not clearly erroneous.
Martin relies heavily on the Bankruptcy Court's statement that, "It
well may be"
that Martin did not believe the guaranties were material. Opinion at 17.
Martin argues that this statement by the Court indicates that the Court
only found Martin to be negligent, not reckless. This Court disagrees.
When read in the context of the entire Opinion, the Bankruptcy Court
found that Martin was a sophisticated businessman who consciously hid his
contingent liabilities. The Bankruptcy Court did not find Martin to be
Martin argues that the Bankruptcy Court used the wrong legal standard
when it stated that a rebuttable presumption of an intent to deceive
arises upon the publishing of a materially false financial statement. The
Bankruptcy Court cited several cases when it summarized the law regarding
an intent to deceive under § 523. Opinion at 16-17. In that summary, the
Bankruptcy Court listed persuasive authority that said that such a
presumption arose from publishing a false financial statement. In re
Jones, 88 B.R. at 903. The Bankruptcy Court, however, did not rely on
this authority in its analysis. Rather, the Court found that the evidence
raised an inference that Martin intended to deceive the Bank. Since the
Bankruptcy Court did not rely on any presumptions, the reference to the
statement in the Jones case is dicta and is not a basis for reversal.*fn6
The finding that the Bank relied on the Financial Statement also is not
clearly erroneous. Culler testified she was the underwriter who
recommended that the Bank make the loan. She further testified that she
relied on the Financial Statement in making this recommendation. The
recommendation in the Credit Memo prepared by Culler and her staff refers
to information in the Financial Statement. The Bankruptcy Court found
Culler to be credible. This evidence supports the conclusion that the
Bank relied on the Financial Statement. The decision is not clearly
Martin argues that the loan was made because Holland was friends with
Young and that the Bank may not have received the Financial Statement
before it made the decision to make the loan. These arguments are
inconsistent with Culler's testimony that she relied on the Financial
Statement. The Bankruptcy Court found Culler to be credible. This Court
will not disturb that credibility determination.
D. Reasonable Reliance
Martin also challenges the Bankruptcy Court's finding that the reliance
was reasonable. Reasonable reliance must be evaluated in context of the
totality of the circumstances. Generally, "`reasonableness is
circumstantial evidence of actual reliance' and . . . a creditor should
not be denied protection against discharge unless the `creditor's claimed
"reliance" on a "financial statement" would be so unreasonable as not to
be actual reliance of all.'" In re Morris, 223 F.3d at 553, quoting In
Garman, 643 F.2d 1252, 1256 (7th Cir. 1980).*fn7 In considering the
issue of reasonable reliance, the Court should not second-guess a
financial institution's lending decision. In re Morris, 223 F.3d at 553.
If under a totality of the circumstances, a false financial statement
appears to give a complete picture of a debtor's financial condition, a
creditor is entitled to rely on the statement without verification:
[A]lthough a creditor is not entitled to rely upon an
obviously false representation of the debtor, this
does not require him or her to view each
representation with incredulity requiring verification
. . . Absent any facts reasonably indicating
verification was necessary, we are not persuaded that
the . . . failure to verify rendered [the creditor's]
reliance so unreasonable as to discharge [the
Garman, 643 F.2d at 1260.
Under this standard, this Court cannot say that the Bankruptcy Court
clearly erred in its finding that the Bank's reliance was reasonable. The
Financial Statement appears to be a complete statement of Martin's assets
and liabilities. Martin accompanied the Financial Statement with account
statements from various brokerage houses giving updated information on
the marketable securities that he owned. The Financial Statement
disclosed Martin's retirement account separately. The Bank reviewed
Martin's tax returns for 1999 and 2000. These returns showed ample income
to pay the debts disclosed on the Financial Statement, including the debt
secured by the Citation. The Bank's underwriters inquired about the
Martin's taxable wages in 1999 and 2000, showing that the underwriters
reviewed the tax returns. The Bank secured a credit report and a Beacon
score. The report and the Beacon score of 705 were consistent with the
picture of Martin's financial condition presented in the Financial
Statement. The Bank further secured an inspection of the Citation before
funding the loan. The Bank thus confirmed the condition of the collateral
before extending the credit. Given the steps taken by the Bank, the
Bankruptcy Court's finding of reasonable reliance was not clearly
Martin argues that the Bank failed to follow proper procedures in
evaluating the loan application. The underwriters took a day, at most, to
recommend approving the loan. Young sent information on December 11 and
12, 2001; Culler decided to recommend approving the loan on December 12;
and her staff completed the Credit Memo on December 13. The Bank secured
Martin's signature on the loan documents on December 17, 2001, two days
before its inspector had even seen the aircraft and confirmed its
existence. This Court agrees that the Bank's procedures seem
unconventional; however, Culler testified that the Bank regularly tried to
act quickly on aircraft loans. Trial Transcript at 154-55. The Bankruptcy
Court found Culler's testimony to be credible. The Bankruptcy Court and
this Court should not second-guess the Bank's lending policies and
procedures. In re Morris, 223 F.3d at 553. The expedited procedures the
Bank used to approve the loan do not make the Bankruptcy Court's finding
of reasonable reliance clearly erroneous.
Martin also argues that numerous factors should have raised red flags
would have reasonably required the Bank to inquire further. Martin notes
that the Financial Statement and the statements from the brokerage
account showed that Martin suffered significant reductions in the value
of his marketable securities. He argues that this should have created
some question in the mind of the Bank's personnel that would require
further verification. The Court disagrees. The Bank was primarily
interested in Martin's earning capacity as an indication of his ability
to pay the debt service. Secondarily, the Bank was interested in the
condition of the Citation since it would be the collateral for the loan.
Martin's marketable securities were not as important to the Bank's
evaluation of the loan; a reduction in those accounts would not
necessarily have been a red flag. The Bankruptcy Court's decision on this
point was not clearly erroneous.
Martin also argues that his tax returns raised a red flag because they
disclosed that his investments in the Enterprises were "at risk." Martin
argues repeatedly that the "at risk" notation on the tax returns told the
Bank representatives that Martin was liable for the Enterprises' debts.
This is incorrect. The "at risk" notation only told the Bank that Martin
could deduct the Enterprises' losses on his personal tax return under
certain circumstances. See 26 U.S.C. § 465. An investment may be "at
risk" for purposes of the Internal Revenue Code under several
circumstances. For example, "[A] taxpayer shall be considered at risk for
an activity with respect to amounts including (A) the amount of money
and the adjusted basis of other property contributed by the taxpayer to
the activity, . . ." 26 U.S.C. § 465(b)(1)(A). In such
a circumstance, the "at risk" notation on a tax return only means
that the taxpayer had contributed money or property to the business, not
that he was personally liable for any of the debt of the business. Thus,
the "at risk" notation on Martin's tax return did not necessarily tell
the Bank that he was liable for the debts of the Enterprises.
Martin also notes that the returns told the Bank that Martin had $
1,621,073.00 in accumulated passive losses in his investment in the
Enterprises. Martin's accumulated passive losses told the Bank little or
nothing about Martin's ability to repay the proposed loan. Rent is
passive income. 26 U.S.C. § 469(c)(2). This would include the rent
collected by the LLCs on the equipment leases. Losses from businesses
that generate passive income are passive losses. 26 U.S.C. § 469(d)(1).
Martin could deduct his share of the Enterprises' passive losses from his
personal income, but only to the extent of his passive income.
26 U.S.C. § 469(a)(1). Losses that exceeded the passive income were
accumulated by Martin on his tax return and carried forward to the next
taxable year. 26 U.S.C. § 469(b). The accumulated passive losses on
Martin's return, thus, reflected a cumulative figure of excess passive
losses amassed over time by Martin on his personal tax returns. The
figure did not indicate anything about the current financial condition of
the Enterprises. The figure further did not indicate that Martin was
personally liable for any losses of the Enterprises.
Beyond this, Martin's argument implies that a lender must assume that
any borrower who owns an "at risk" business investment is liable for all
the debts of the
business, and the lender cannot rely on a personal financial statement
from such a borrower and must investigate the financial well-being of the
business. This is inconsistent with the concept of reasonable reliance
set forth in Garman and cited with approval in Morris. A lender is
entitled to believe that the prospective debtor is honest and rely on the
financial statement that appears to be complete. In re Garman, 643 F.2d
at 1260. An honest borrower will disclose the extent of contingent
liabilities that materially affect his financial condition. A lender is
not expected to question notations on a tax return which are not
obviously inconsistent with the borrower's financial statement. The
Bankruptcy Court did not clearly err in finding that Martin's tax returns
did not raise a red flag. The Bankruptcy Court's finding of reasonable
reliance was not clearly erroneous.
E. Extension of Time to File Non-Dischargeability Complaint
The Bankruptcy Court also did not abuse its discretion in allowing the
Bank's motion to extend the time to file a complaint challenging the
dischargeability of its claim. Whether to grant the extension is a
decision within the discretion of the Bankruptcy Court. A reasonable
person could have concluded that the circumstances of this case warranted
an extension. The Bankruptcy Rules contemplate that a creditor will have
sixty days after the first meeting of creditors to file a complaint to
object to the dischargeability of a debt. Bankruptcy Rule 4004. In this
case, the first meeting of creditors did not actually begin until August
8, 2002, only seven days before the deadline for filing a complaint. A
reasonable person could conclude that a creditor
should be entitled to some additional time under these circumstances.
Furthermore, the Bankruptcy Trustee supported the request for an
extension at the in-court September 20, 2002, hearing. The Trustee has a
fiduciary duty to act in the best interest of creditors. Matter of
Salzer, 52 F.3d 708, 712 (7th Cir. 1995). Given the Trustee's position in
favor of granting an extension, and the delay in the meeting of
creditors, this Court cannot conclude that the Bankruptcy Court abused
its discretion in granting the request.
Martin argues that he was denied his right to notice and a hearing.
Martin was entitled to notice and a hearing on whether to grant the
extension. Bankruptcy Rule 4004. The Bankruptcy Court improperly entered
the order on August 16, 2002, before giving Martin notice and the
opportunity to ask for a hearing. The Bankruptcy Court, however, granted a
hearing on September 20, 2002, to consider Martin's objection to the
extension. The hearing occurred promptly, before Martin was required to
respond to the Bank's complaint.*fn8 Martin's counsel was present and
had an opportunity to argue against the extension. Martin was not
prejudiced by the Bankruptcy Court's procedures.
Martin states in his brief that the Bank presented no evidence during
the telephonic hearing, but Martin did not present any evidence to
support that assertion.
The record on appeal contains no transcript or bystander's report
attesting to what occurred during the hearing. Based on the record
presented, the Bankruptcy Court did not abuse its discretion by granting
the Bank an extension of time to file its complaint.
THEREFORE, the decision of the Bankruptcy Court is AFFIRMED. All
pending motions are denied as moot. This case is closed. The Bankruptcy
Court may proceed with the determination of the amount of the
non-dischargeable debt owed by Randolph S. Martin to Union Planters
Bank, National Association.
IT IS THEREFORE SO ORDERED.